What Dividend Yield Is
Dividend yield tells you how much a company pays in dividends each year relative to its share price. It is expressed as a percentage.
The formula:
Dividend Yield (%) = Annual Dividend Per Share / Current Share Price x 100
If a company pays $2.00 per share annually and the share price is $40.00:
$2.00 / $40.00 x 100 = 5.0%
This means for every $100 invested, you receive $5 in dividends per year (before tax). It is the income return on your investment, separate from any capital gain or loss.
Calculating with Australian Franking Credits
Australian dividends often come with franking credits (also called imputation credits). These represent tax the company has already paid on the profits being distributed.
A fully franked dividend means the company has paid the full 30% corporate tax rate on those earnings. You receive the cash dividend plus a franking credit that offsets your personal tax obligation.
The grossed-up yield accounts for franking credits and gives you a more accurate picture of the total return:
Grossed-Up Yield = Cash Dividend / (1 - Corporate Tax Rate) / Share Price x 100
Using the previous example with a fully franked $2.00 dividend:
Grossed-up dividend = $2.00 / (1 - 0.30) = $2.00 / 0.70 = $2.857
Grossed-up yield = $2.857 / $40.00 x 100 = 7.14%
The 5% cash yield becomes a 7.14% grossed-up yield once you factor in the tax credit. For investors in lower tax brackets (below the 30% corporate rate), the franking credit actually results in a tax refund -- making the effective yield even higher.
For partially franked dividends, adjust the calculation based on the franking percentage:
Franking credit = Cash Dividend x Franking % x Corporate Tax Rate / (1 - Corporate Tax Rate)
A 50% franked dividend of $2.00:
Franking credit = $2.00 x 0.50 x 0.30 / 0.70 = $0.429
Grossed-up dividend = $2.00 + $0.429 = $2.429
Grossed-up yield = $2.429 / $40.00 x 100 = 6.07%
Use our free dividend yield calculator to run these numbers with any franking percentage.
Why Yield Alone Is Not Enough
A high dividend yield looks attractive on the surface, but several factors determine whether it is genuinely valuable or a warning sign.
Payout Ratio
The payout ratio measures what percentage of earnings a company distributes as dividends. A company earning $3.00 per share and paying $2.00 has a payout ratio of 67%.
- Under 60% -- Generally sustainable. The company retains enough earnings for growth and has a buffer if profits dip.
- 60-80% -- Moderately high. Sustainable for mature companies with stable earnings (banks, utilities, REITs), but leaves less room for error.
- Above 80% -- High. The company is distributing most of its profits. Any decline in earnings could force a dividend cut.
- Above 100% -- Unsustainable. The company is paying out more than it earns. This is funded by debt, reserves, or asset sales, and a cut is likely.
Earnings Sustainability
A mining company with bumper commodity prices might pay a massive special dividend one year and nothing the next. Trailing yield based on that special dividend is misleading.
Look at the dividend history over five or more years. Companies that have maintained or grown their dividend through economic cycles (CBA, Wesfarmers, CSL) are more reliable than those with erratic payment histories.
Franking Percentage
Two stocks might both yield 5%, but one is fully franked and the other is unfranked. The grossed-up yields are 7.14% and 5.0% respectively -- a meaningful difference, particularly for SMSF accounts in pension phase where franking credits are refunded in full.
Trailing vs. Forward Yield
Trailing yield uses the dividends paid over the past 12 months divided by the current price. This is backward-looking and factual -- it tells you what was paid.
Forward yield uses analyst estimates of next year's dividends divided by the current price. This is forward-looking and speculative -- it depends on earnings forecasts being accurate.
Most financial websites display trailing yield by default. Forward yield is useful when a company has announced a change in dividend policy or when earnings are trending clearly up or down.
Be cautious with forward yield during earnings season. Analyst estimates shift, and a company that misses earnings expectations may cut its dividend, making the forward yield immediately irrelevant.
High-Yield Traps
A stock showing an unusually high yield -- say 10% or more when the market average is 4% -- is often a trap rather than an opportunity.
Why yields spike:
- Falling share price. If a stock drops 40% while the dividend stays the same, the yield doubles. But the share price dropped for a reason, and the dividend may follow.
- One-off special dividends. A company sells an asset and pays a special dividend. The trailing yield includes this non-recurring payment.
- Unsustainable payout. The company is paying out more than it earns, propping up the dividend temporarily.
Before chasing high yield, check: Is the payout ratio sustainable? Has the share price fallen sharply (suggesting the market expects a dividend cut)? Is the yield inflated by a special dividend?
How Swing Traders Should Think About Dividends
For most swing trading, dividends are a minor consideration. Here is why.
Swing trades typically last a few days to a few weeks. The annualised yield on a stock held for two weeks is irrelevant to the trade thesis. You are trading the price movement, not the income stream.
When dividends do matter for swing traders:
- Ex-dividend dates. Stock prices typically drop by the dividend amount on the ex-dividend date. If you are holding a position over an ex-date, factor this into your stop loss and target calculations. A $1.00 dividend on a stock at $30.00 means a 3.3% overnight drop that is not a signal -- it is a calendar event.
- Dividend announcements. Larger or smaller than expected dividends can move prices. A surprise dividend cut on a bank stock can trigger a multi-day decline. A surprise increase can create momentum.
When dividends matter a lot:
- SMSF portfolios. Self-managed super funds, particularly in pension phase, benefit significantly from franking credits. If you manage an SMSF and hold some positions for longer periods alongside your swing trades, grossed-up yield becomes a real factor in stock selection.
- Longer-hold swing trades. Some swing traders hold positions for one to three months. At that duration, capturing a dividend is a bonus, and the franking credit adds genuine value.
For short-duration swing trades measured in days, focus on the price action. For longer holds in tax-advantaged accounts, calculate the grossed-up yield and factor it into your analysis.